Why the product tanker capacity fall could be negative for stocks

In a commoditized industry like shipping, capacity (supply) is an important metric that directly impacts companies’ top line or revenue performance. When capacity grows faster than demand, competition rises among individual shipping firms as they try to use idle ships and cover fixed costs. This will lower day rates, which will negatively affect bottom-line earnings, free cash flows, and share prices for tanker companies.

On September 27, year-over-year capacity growth for product tankers stood at 5.9%, according to IHS Global Limited. The latest data is below the recent high of 7.57% in August 23 and is below figures for most months in early 2013.

Analysts look at year-over-year growth because it adjusts for possible seasonality and short-term noise. Demand figures are often quoted on a year-over-year basis for the same reason, which also makes it easier to compare supply and demand. If supply growth outpaces demand growth, shipping rates aren’t going to rise, which can negatively impact shares.

Interpretation of capacity growth

Capacity growth is generally considered a lagging indicator because there’s a lag period between the time managers see increased demand and the time they place new vessel orders and receive these new builds. However, it’s interesting that the characteristic doesn’t hold true for the product tanker industry. Instead, it appears to show the characteristics of a leading or coincident indicator.

When shipping companies’ shares fell through October 2010 to October 2012, the share prices of companies such as Scorpio Tankers Ltd. (STNG) and Navios Maritime Acquisition Corp. (NNA) also fell. When capacity growth bottomed in October last year, the share prices of product tankers continued to slip for a few months, but they’ve rebounded nicely since the beginning of 2013.

Is this a coincidence? Maybe. But it may be worth watching, because there could be something different about the industry that results in this relationship. If the relationship holds, the recent decline in year-over-year growth may reflect weak or weakening demand for product tankers, especially since shipping rates also fell on a year-over-year basis recently.

Impact on the share prices of product tanker stocks

Although it’s probably too early to say this is long-term negative for product tankers, the short-term outlook for tanker companies such as Scorpio Tankers Ltd. (STNG), Navios Maritime Acquisition Corp. (NNA), Tsakos Energy Navigaion Ltd. (TNP), and Capital Product Partners LP (CPLP) may see some short-term weakness. The Guggenheim Shipping ETF (SEA) could also be negatively affected, but the shipping industry as a whole appears to be doing well, as global trade is picking up and supply growth for other industries in shipping is coming down.

To help us personalize your experience, which of the following best describes you?

Financial Adviser

Investment Professional

Individual Investor

What is the approximate total amount of the assets under your advisement?

Less than $25 million

$25 million to $99 million

$100 million to $499 million

$500 million or greater

What is the approximate amount of your firm's total assets under management (AUM), if applicable?

Less than $25 million

$25 million to $249 million

$250 million to $999 million

$1 billion to $9.99 billion

$10 billion or more

Don't know

Not applicable

What is your total amount of investable assets?

Less than $25,000

$25,000 to $99,999

$100,000 to $249,999

$250,000 to $999,999

$1 million or greater

Prefer not to say

Thank you!

x

There are no shortcuts to investing.

But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.

We think so too.

There are no shortcuts to investing. But if everyone had access to the trade secrets the top 10% of hedge fund managers use, their retirement path to wealth would be clearer. Enter your email address to discover how in our Market Realist Chronicles newsletter. You’ll receive must-know market insights straight from our former hedge fund manager, who managed $1 billion and made $2,000 an hour in the market, and his team of unbiased professional analysts.

Customize your experience.

Complete your registration by adding a password and customizing your Market Realist experience. You’ll quickly create a watch list to track the stocks and ETFs that matter most to you and your portfolio.